Cablegate: Costa Rica--Being Outside Cafta has Consequences

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E.O. 12958: N/A
TAGS: ETRDEINVECINPGOVCS
SUBJECT: COSTA RICA--BEING OUTSIDE CAFTA HAS CONSEQUENCES

1. (U) Summary. The Dominican Republic and Costa Rica are the only
signatories where CAFTA-DR is not yet in force. Costa Rica is the
only country that has not ratified the agreement. Although the
Arias Administration has placed a high priority on both ratification
and passage of the necessary implementing legislation to bring the
treaty into force, little progress has been made during the first
100 days of his administration. Post has identified serious
specific negative consequences for Costa Rica should they remain
outside the FTA. End Summary.

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Ratification and Implementation Process
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2. (U) Although Costa Rica took an active role in negotiating
CAFTA-DR, the ratification process has not gone smoothly. Against a
backdrop of significant opposition from various sectors, former
President Pacheco steadfastly refused to send the treaty to the
National Assembly for ratification until October 2005. Such
reluctance on the part of the executive branch of government
disappeared when President Arias took office on May 8. He
consistently said during his campaign, after his election, and after
taking office that CAFTA-DR ratification and implementation was a
high priority for his Administration. Arias's party has the largest
bloc in the unicameral Asamblea and controls 25 of the 57 seats.
The International Relations Committee has undertaken an aggressive
schedule of hearings to take testimony from the long list of
interested civic sectors that demanded to speak on the treaty. From
early June until late August the committee plans to meet twice
weekly to listen to testimony from 38 different groups representing
various sectors and viewpoints. Embassy contacts suggest that the
Committee's action, an up or down vote on whether to recommend
ratification for a plenary vote, may not take place until December
for strategic political reasons.

3. (U) Meanwhile the Arias administration continues to move forward
with some of the legislation that will be necessary to bring the
treaty into force. Although the other CAFTA-DR countries have
followed a pattern of first ratifying the treaty and then
considering implementing legislation, the GOCR is fully aware that
the clock does not give them the luxury of doing them sequentially,
so the process is unfolding in parallel. Under an unusual legal
framework, the Executive branch controls the Legislative agenda
during the month of August and from December 1 through March 31 of
each year. During these intervals, the Administration can force the
legislative branch to consider CAFTA-related legislation. To date
the Administration has requested action on CAFTA-related legislation
in the areas of intellectual property rights and opening of the
state insurance monopoly. Although drafts of the highly
controversial telecommunications reform have been quietly
circulated, Embassy contacts indicate that this legislation most
likely will not/not be forwarded to the Assembly during the current
August session. Telecom legislation is arguably the legislation
that will be most difficult to pass in Costa Rica where the telecom
parastatal ICE is a much beloved public institution. ICE's vocal
labor union threatens to take the matter to the streets. The
Administration has sent conflicting signals on when it will
introduce telecom reform legislation. During September, October and
November the leadership in the Asamblea will determine the pace of
CAFTA-related legislation.

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Negative Consequences of Not Bringing CAFTA-DR Into Force
--------------------------------

4. (U) Tariffs: Under CBI currently 74% of Costa Rica's products
enter the U.S. duty free; under CAFTA 99.8% would be tariff-free.
Not entering CAFTA immediately denies a significant advantage to
25.8% of Costa Rica's products that are still subject to duties.
For example, a local textile plant recently laid off 200 of its 1500
workers due to declining sales that the company attributes to the
18.5% duty it must now pay that its CAFTA competitors do not face. A
plastics company has stated that if CAFTA is not passed it will move
20% of its production to Nicaragua at a cost of 200 Costa Rican
jobs. A large melon exporter has recently purchased 4,000 hectares
of land in Nicaragua stating it would not be able to continue to do
business in Costa Rica if CAFTA is not approved. Some 50% of the
company's export sales go to the U.S. where the products are subject
to a 29.9% tariff, which is not required for melons grown in
Nicaragua. An eventual shift in production to Nicaragua would cause
a loss of 5,000 jobs in Costa Rica.

5. (U) Foreign Direct Investment: Costa Rica has traditionally
received about 48% of U.S. FDI in Central America. During the last
year the percentage dropped to 42%. The difference is due to
increased investment in the countries that have already entered
CAFTA. For example, El Salvador is experiencing increased FDI and
growth in textiles. Most worrisome for Costa Rican decision makers
is the increased competition from Salvadorian call centers, a
traditional Costa Rican strength. Comment: While Costa Rica has
experienced overall growth in FDI recently, much of that can be
attributed to the purchase by foreign banks of three large local
private banks and very significant residential real estate
investment by foreigners. End Comment.

6. (U) Manufacturing: A large manufacturer of kitchens and
refrigerators linked to 160 local suppliers had announced plans to
make an $US80 million investment in an attempt to double sales. The
investment would generate 1,000 new jobs. But the company president
subsequently announced that without the business security that
CAFTA-DR would bring, his company will not invest further in Costa
Rica. Costa Rica's sewing thread industry has suffered an 80%
reduction in exports because of the difficulty in complying with
CAFTA's rules of origin. One plant is considering an offer to move
operations to El Salvador where the GOES has reportedly offered to
pay 50% of the costs of both moving the plant and training new
employees. A textile industry spokesperson has said that a large
firm that produces boxer shorts may soon move from Costa Rica to
either El Salvador or Honduras where production would not be subject
to duties. The same source said a Swiss fabric company is
contemplating an investment of $US100 million and has visited both
Costa Rica and Honduras. The source believes this investment will
not come to Costa Rica unless the country brings CAFTA-DR into
force.

7. (U) Comment: Costa Rica's roads are notorious for their
potholes, but the country will face more than a few economic and
political bumps, as well, in the coming months. With a deadline to
bring CAFTA-DR into force before March 2008, the clock is rapidly
ticking while the Costa Rican political process moves at a glacial
pace. It remains to be seen whether President Arias can generate
enough additional public support for CAFTA-DR to overcome the
current legislative inertia and the type of procedural feints that
could allow a minority to prevent passage of CAFTA's implementing
legislation. Meanwhile, the Costa Rican economy is beginning to
fray around the edges. End Comment.
Langdale

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